Does a Texas private investigator have to charge sales tax on reimbursed expenses like mileage, hotel bills, and photographs billed to a client?

Plain-English summary

A private investigation firm asked the Comptroller whether it has to charge sales tax on expenses it passes through to clients — things like mileage, hotel bills, cassette tapes, photographs, film, and the cost of buying reports used in an investigation. The Comptroller's answer: yes, in almost every case.

Investigative work is a taxable service under Texas Rule 3.333 (Security Services) and, in some circumstances, Rule 3.355 (Insurance Services). Under Tax Code § 151.007, the "sales price" of a taxable service includes reimbursable expenses like mileage and hotel charges — these fall under § 151.007(a), a category of costs that cannot be excluded from the taxable price even when they are itemized separately on the invoice. So it doesn't matter whether the investigator bundles these costs into one lump-sum fee or lists them out as separate reimbursements — the whole amount is taxable.

There is one narrow carve-out: police reports bought from a government agency. If the investigator pays for a police report and then rebills the client the exact same amount (a dollar-for-dollar pass-through), that pass-through is not taxable. But if the investigator adds any markup or service charge on top of that report cost — even if the markup is stated separately — the markup itself is taxable, and if the markup is folded into one lump-sum charge with the report cost, the entire lump sum becomes taxable.

The letter also reminds the investigator that it must pay tax up front (hotel tax, sales tax, fuel tax, etc.) when it buys these items, unless the item itself (like a cassette tape or photograph) is physically handed over to the client as part of the service, in which case the investigator can typically buy that item tax-free using a resale certificate and let the tax fall on the final taxable service charge instead.

What this means for you

Private investigators and security-service providers

Build your invoices assuming that mileage, hotel, lodging, and materials costs (tapes, film, photos, and purchased reports) are part of your taxable service charge. Separately itemizing them on the invoice does not make them exempt — only the narrow police-report pass-through exception avoids tax, and only if you charge exactly what you paid with no markup.

Firms that resell purchased reports or government records

If you buy a police report from a government agency and rebill your client dollar-for-dollar with no markup, that specific line item is not taxable. The moment you add any service fee or markup to that line, the markup becomes taxable — and if you don't separately state it, the whole lump sum (report cost plus markup) is taxed.

Accountants and tax professionals

This letter turns on the sales-price definition in Tex. Tax Code § 151.007. Subsection (a) items (like mileage, hotel, and similar out-of-pocket costs incurred in performing the service) cannot be excluded from the taxable sales price even when separately stated. That's different from items that can be excluded only if separately stated — this letter's police-report exception is really a narrow "cost of goods purchased for resale on behalf of a client" situation, not a general separately-stated-expense exclusion.

Common questions

Q: If I list mileage and hotel costs as separate line items instead of folding them into my fee, are they exempt?
A: No. Under Tex. Tax Code § 151.007(a), these costs cannot be excluded from the taxable sales price of the service regardless of whether they're itemized separately or bundled into a lump sum.

Q: Do I owe sales tax when I buy the cassette tapes, film, or hotel rooms myself?
A: Generally you owe tax at time of purchase on tangible personal property you use to perform the service, unless care, custody, and control of that item (e.g., a cassette tape or photograph) actually transfers to the client — in that case you can typically purchase it tax-free for resale and the tax applies to your service charge instead.

Q: Are police reports I buy from a government agency taxable when I rebill my client?
A: The government agency generally doesn't charge tax on the report to begin with. If you rebill the client the exact amount you paid (dollar-for-dollar, separately stated), that reimbursement is not taxable. Any markup or service charge you add is taxable.

Q: What if I charge one lump sum that includes a marked-up police report cost?
A: Then the whole lump-sum charge is taxable — the exemption only applies to a clean, separately stated, no-markup pass-through of the report cost.

Q: Does this ruling still reflect current Comptroller policy?
A: It's a 1992 letter ruling and is not binding on the Comptroller for any taxpayer other than the one who requested it. STAR system rulings can change or be superseded; check current versions of Rules 3.333 and 3.355 and Tax Code § 151.007 before relying on this reasoning today.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.007 (definition of "sales price"; subsection (a) items not excludable even if separately stated; subsection (c) items excludable only if separately stated)
• 34 Tex. Admin. Code § 3.333 (Security Services)
• 34 Tex. Admin. Code § 3.355 (Insurance Services)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1196C07

Original ruling text

ALERT: For specific guidance relating to the care, custody and control of TPP when providing a taxable service, please see Rule 3.285, Resale Certificates; Sales for Resale (amended 11/01/2017.

August 24, 1992

Dear ***:

Thank you for your letter questioning whether reimbursable expenses in
connection with investigative services are subject to sales tax. I hope you
will accept my apology for the delay in responding to your request.

Investigative services may be taxed under Rule 3.333, Security Services and
under Rule 3.355, Insurance Services. I have enclosed copies of each of these
rules for your review.

The total charge for security services and insurance services includes mileage
charges, hotel bills, cassette tapes, photographs, film, costs of purchasing
reports included in the investigation, etc. These charges are a part of the
sales price of the taxable service whether separately identified as
dollar-for-dollar reimbursable expenses or included in a lump-sum total amount.

The definition of sales price may be found in Texas Tax Code Section 151.007.
Subsection (a) lists items that may not be excluded from the sales price even
though separately stated; subsection (c) lists items that may be excluded only
when separately stated on the invoice. Mileage charges, hotel bills, etc.,
fall within subsection (a) and may not be excluded from the sales price. The
service provider must pay hotel tax, sales tax, fuels tax, etc., on these items
at the time of purchase.

The service provider must pay tax at the time of purchase on tangible personal
property, unless the care, custody, and control of the tangible personal
property is transferred to the purchaser during the performance of the service.
certificates on cassette tapes, photographs, and perhaps some taxable reports
when those items are actually transferred to your firm.

Police reports obtained from a governmental agency are not taxable when
purchased by the investigation company. A separately stated dollar-for-dollar
reimbursement for the police reports rebilled to your company is not taxable.

However, any separately stated service charge or markup is taxable. If the
markup or service charge is included in a lump-sum charge for the nontaxable
report, the total lump-sum charge must be taxed.

This opinion is based upon the facts presented. If there are additional or
different facts the opinion may change.

You may write to Tax Administration Division, Comptroller of Public Accounts.

Sincerely,

Tax Administration Division